Sunday, September 13, 2009

Roads Paved With Good Intentions

Reading Whitman's essay “The Role of Incentives in Creating Unintended Consequences” this paragraph jumped out at me:

“What distinguishes good economic thinking from bad is recognition of the subtle, creative, and often unforeseen ways that people respond to incentives. Ignoring the complex operation of incentives is a recipe for unintended consequences.”

One of the coolest things about this nifty little apparatus of the mind we call economics is its ability to cut to the bottom of things. To confront people with the constraints limiting their utopias and the unintended consequences of their actions. Whitman and others rightly note that the main difference between a great economist and a lousy one lies mostly in their respective abilities to look past simple first-degree linear causalities like cause and effect and look instead at cause and effect... and effect... and the effects of other effects ad infinitum.

Bastiat wrote about this distinction and the importance of predicting unintended consequences over 150 years ago in his essay “What Is Seen and What Is Not Seen”

“An act, a habit, an institution, a law, gives birth not only to an effect but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen: it is well for us if they are foreseen"

Most politicians, voters, pundits, journalists, etc. would only like to concern themselves with what is seen. A good economist will look ahead and attempt to illuminate what goes unseen.

Slave redemption, “fair” trade, or car allowance rebate schemes might seem like fantastic ideas when you're shortsighted enough to only look at their immediate intended effects, but the economic way of thinking allows us to look deeper into the potential consequences of these well intentioned, and usually popular policies. Often we look back and find that the intended effects of such actions are quite different from the effects that we actually get. Sometimes we find that our good intentions result in outcomes that end up doing even more harm to those we were originally trying to help.

The Law of Unintended Consequences is one of the most important principles one can take away from their study of economics. That said, what are some of your favorite unintended consequences?

1 comment:

You mentioned that "One of the coolest things about this nifty little apparatus of the mind we call economics is its ability to cut to the bottom of things." I'm not so sure that it does. It tells us that we need to anticipate the unintended. It encourages us to expect the unexpected. It even makes seeking knowledge of the unknown part of its very core. One of the first things you learn in Econ. 101 is the Law of Unintended Consequences. According to Rob Norton in the Concise Encyclopedia of Economics, "The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended."

How does that help us!?

It reminds me of that shirtless guy you see on the TV show Cops. You know the guy who is being handcuffed and tossed into the back of the police cruiser muttering, "I just knew something like this would happen." I mean, he knew something would happen, but then so do the economists. They just didn't know what.

It's possible that I don't know all there is to know about the law of unintended consequences. In my opinion the law of unintended consequences is saying something like this. "Good Luck, Smart Guy!" It's as if Chaos Theory drank a six pack of Red Bulls, picked up his old buddy Murphy's Law, and drove toward his ex-girlfriend's house: first stop, the liquor store.

At least we're trying, right? I liked the part of Whitman's article where he mentioned the difference between the "Guy on Cops" and a "Lousy Economist". "A person with little or no economics training often ignores incentives entirely, by treating people like robots who just respond to their programming. They keep on doing what they're doing, however much we alter their surroundings. A lousy economist regards people as more sophisticated robots. They change their behavior in response to changes in their incentives, but only in specified and highly predictable ways."

He then goes on to talk about the task of a good economist. "A good economist realizes that human beings are imaginative and clever. They change their behavior in response to incentives in both predictable and unpredictable ways, constantly seeking to improve their lives in light of new conditions." In all the examples of incentives gone un-intendedly wrong mentioned in the article, buying back slaves, rent controlled apartments, Italian basement viper breeding, and gun buy-backs, the economists were always a step behind. (We predicted that we'd be behind, we just didn't know how far.) Thank Saint Gosh, we didn't have to recommend any economic policies to deal with slave owning, gun toting, viper breeding Italians living in rent controlled apartments. We might have ended up in the back of that police cruiser with the muttering shirtless guy.

Heyne's "The Economic Way of Thinking" really brings it home for us in chapter one. "It's important to realize, however that economic theory by itself cannot answer any interesting or important social questions. The economic way of thinking has to be supplemented with knowledge drawn from other sources: knowledge about history, culture, politics, psychology, and the social institutions that shape people's values and behavior."